The Problems with Harvey

In the days after a catastrophic loss like Hurricane Harvey, challenges abound for insurers. Due to the extensive damage often caused by a disaster, insureds are justifiably distraught. Claims volume is overwhelming and almost certainly exceeds the ability of an insurer’s existing roster of field claims professionals to handle, which can lead to a reliance on third-party providers that might not be completely familiar with a company’s claims handling processes. Experts and engineers can be in short supply, and they can be undermined by well-intentioned claims professionals. Finally, there is the likelihood of impending litigation. Fortunately, history provides some lessons from which to learn.

Independents’ Day

Despite the value they add, the retention of independent claims professionals can present challenges. First, these claims professionals are frequently from states outside of the location where the claim is being handled. As such, they may not have independent knowledge of local laws and regulations, and they will not be familiar with local public adjusters and vendors.

Second, most independent claims professionals do not handle claims for just one insurance company. As some insurers do not utilize ISO forms, independent claims professionals may not be completely conversant with the insurer’s applicable policy forms and endorsements. Due to this factor, claims may be incorrectly denied or covered, or payments may be calculated incorrectly. While catastrophic losses present a chaotic environment, insurers must expend maximum effort to ensure that all claims professionals are compliant with the normal operating standard.

Expert Opinions

Another key to success for insurers after a catastrophic event is to retain and deploy appropriate experts. It is well known that homeowners’ policies generally provide coverage for damage caused by wind while excluding damage caused by flood. When a home is destroyed in a hurricane like Harvey, whether the home was damaged by wind or flood is often the central question.

For several reasons, this question is generally best addressed by an engineer instead of a claims professional. First, in the days immediately after a loss, claims professionals may not have access to extensively developed wind and weather data. By contrast, an engineer’s report should contain a conclusion only after a considered review of appropriate, well-developed data. Second, while claims professionals usually are well trained, engineers typically have more advanced education, training, and experience to make complex determinations relating to causation. Finally, if a claim is denied due to a conclusion that the cause of loss is flood, then the denial is much stronger if it is rooted in the opinion of an independently retained engineer rather than a claims professional employed by the insurer.

Even with the retention of an expert, potential pitfalls exist. The insurer must take great care to make certain that the conclusions of the engineer are not undermined by the early notes of the field claims professional. For instance, an insurer may retain an engineer who ultimately opines that a home was damaged or destroyed by flooding, an excluded peril. Critically, however, the considered conclusion of a qualified engineer can be undermined in litigation by an early note from a field claims professional, which erroneously attributes the loss to wind, a covered peril. While the engineer is better positioned to assess the actual cause of loss, the claims professional’s early note can jeopardize the insurer’s well-founded position. If there is any doubt as to the cause of loss, then appropriate experts should be retained. Until an appropriate expert opines on the cause of loss, claims professionals should be instructed to avoid doing so.

Damage and Disputes

As time passes and claims develop, disputes begin to crystallize. Policyholders can be expected to retain public adjusters, engineers, or other professionals to assist with their claims. After a storm like Hurricane Harvey, a determination of the cause of damage is of paramount importance. If a policyholder is insured with both a homeowner’s policy and a flood policy, then the policyholder is generally well protected. However, when a policyholder sustains a combination of flood and wind damage, or when the property is destroyed by either flood or wind, the need to determine the cause of damage is acute.

When it comes to handling catastrophic losses involving flood damage, one fact that quickly comes to light is that a surprising number of homeowners do not purchase flood insurance. According to Federal Emergency Management Agency data, only 17 percent of homeowners in the eight counties most directly affected by Hurricane Harvey had purchased flood insurance. For some homeowners, flood insurance may be cost prohibitive. Other times, waterfront properties are in a family for multiple generations. While the mortgagee likely required the homeowner to maintain flood insurance, the requirement no longer exists once the mortgage is satisfied. Without the requirement to maintain flood insurance, many homeowners elect not to purchase flood insurance. The result is a home left uninsured and unprotected in the event of a catastrophic flood loss.

In this circumstance, some homeowners will simply accept the consequences of their own choices. Other homeowners, however, will utilize public adjusters or attorneys to attempt to establish coverage for flood damage under their homeowner’s policy.

Sandy’s Lessons

The primary argument homeowners without flood insurance advanced in Superstorm Sandy litigation was that the loss was attributable to wind, not flood. Generally, homeowners and their public adjusters prove to be resourceful at locating engineers and professionals who will attribute the damage to the covered peril of wind, even if the science in support of such a position is scant. If the claim or resulting litigation is not settled, then the litigation ultimately reduces to a battle of the experts.

Due to the relatively modest wind speeds experienced during Superstorm Sandy, insurers were at an inherent advantage in such disputes. As Hurricane Harvey involves significantly higher windspeeds than Superstorm Sandy, insureds may find themselves with a stronger claim for coverage.

Other homeowners without flood insurance resort to arguments relating to insurance policy interpretation and rules of construction. If the applicable homeowner’s policy does not contain a strong anti-concurrent causation provision, then plaintiffs’ counsel likely will argue that the absence of such a provision necessitates the conclusion that coverage exists if a covered cause of loss contributes in any way to the loss. Depending on the state, common law may provide support for such a conclusion. Generally, however, the policy language addressing whether coverage exists in the event of a multi-peril loss is the one that controls.

One particularly creative effort to fashion coverage for flood damage in the absence of a flood policy is exemplified by the case of Riccio v. Allstate New Jersey. In Riccio, the homeowners lived in a flood zone, but declined to purchase flood insurance after the mortgage on the insured property was satisfied. During Superstorm Sandy, the insured property was inundated with floodwater. Allstate denied the claim because the loss was caused by the excluded peril of flood.

The homeowner argued that the actual cause of loss was not the floodwater, but rather the dangerous substances contained in the water. The homeowner argued that while the floodwater receded, it was the dangerous substances within the water that remained and rendered the property uninhabitable. Additionally, the homeowner argued that while the policy excluded losses caused by flood, no such exclusion applied to the substances contained within the floodwater.

The trial court granted Allstate’s motion for summary judgment and concluded that the flood exclusion precluded coverage. On appeal, the New Jersey Appellate Division affirmed. The New Jersey Appellate Division reasoned that “property loss caused by flood damage includes not only the damage caused by the water, but also must include the damage caused by the toxic substances carried by the flood waters and left behind after that water recedes. To hold otherwise…would render the flood exclusion in those policies meaningless.”

Riccio is among the latest in a line of cases in which homeowners seek to creatively evade the flood exclusion contained in homeowners’ policies. Fortunately for insurers, these efforts have generally failed. See e.g. In re Katrina Canal Breaches Litigation, in which the 5th Circuit refused to restrict the scope of a flood exclusion by refusing to recognize a distinction between supposed natural and non-natural causes of flood and declined to find the term “flood” ambiguous because it was not defined in the policy; and Sher v. Lafayette Ins. Co., in which the Louisiana Supreme Court declined to find the term “flood” ambiguous because it has more than one dictionary definition. The Sher court also declined to make a distinction between natural flood and supposed man-made flood.

A distinction between damages caused by flood and damages caused by objects that are propelled by floodwater was recognized in Johnson v. Allstate. In Johnson, the insureds claimed that a windstorm caused waves to carry logs that struck their property, thereby displacing it and causing it to collapse. Waves had repeatedly struck the property without incident since 1947, but it was only in 2010 when logs being carried by the waves struck the property and knocked it out of plumb. Under these circumstances, the court recognized that the logs themselves could be considered a peril independent of the floodwater.

While Johnson is an important case, it presents a clear departure from a typical flood situation. Johnson’s unusual facts give it very limited applicability. In this regard, the Riccio court found Johnson inapposite and refused to find that substances contained within floodwater were a peril independent of the floodwater.

It is apparent that thousands of homeowners with property inundated with Hurricane Harvey’s floodwater lack flood insurance. While efforts to recharacterize flood damages largely have failed, insurers should anticipate that arguments like those discussed will be advanced by homeowners who elected not to purchase flood insurance. By heeding the lessons of prior storms, insurers should be equipped to meet these challenges.